Virgin Atlantic acquisition of Flybe approved

Airline consolidation in the United Kingdom to a step forward last Friday as the European Commission approved the acquisition of regional carrier Flybe by Connect Airways. Connect is a consortium founded by Virgin Atlantic and Stobart Aviation, two other UK-based airlines, as well as Cyrus, as US-based aviation investment specialist. The approval, with limited conditions, paves the way for the Flybe operation to be subsumed into a feeder carrier for Virgin Atlantic.

The Commission will require that FlyBe cede slots at Amsterdam’s Schiphol Airport (AMS) and Paris’s Charles de Gaulle Airport (CDG) as part of the approval. Flights between those airports and Birmingham, UK were ruled as likely to see a quasi-monopoly without remediation. Currently FlyBe competes with Air France to Paris and KLM to Amsterdam. With AF/KLM holding a partial management position in Virgin Atlantic and Virgin Atlantic now controlling the new Connect Airways operations the Commission wants to avoid all operations on those routes being influenced unduly by a single airline.

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To that end five daily slot pairs will be released at Schiphol and three at CDG. The slots are to be reallocated “to competing airlines that want to fly the Birmingham – Amsterdam and Birmingham – Paris routes,” according to the ruling. Much like similar rulings related to other mergers it remains unclear just how long the new entrant would be required to operate the Birmingham routes before deciding that another destination might be more profitable from the two major European hubs. Brett Snyder of Cranky Flier explained the potential for such:

When Virgin Atlantic (with partners) rescued Flybe from imminent doom earlier this year, it ended up controlling Flybe’s 12 Heathrow slots (in addition to slots at other constrained airports on the Continent). These slots are currently used for flights within the UK, but they can be used to go anywhere in Europe. If the joint ventures combine to form one big Delta/Virgin Atlantic/Air France/KLM group, then these slots could be used to fly Heathrow to Paris while Air France’s slots could then be used to fly over the Atlantic. This would get rid of the original point of requiring those slots to be used within the UK and just further help consolidate market power to the US by a group that already controls a quarter of the market.

While the the approval pending some slot divestments was expected by most in the industry there is at least one party likely disappointed at just how few slots Flybe must divest. As part of its plans to launch transatlantic service to beginning in 2021 JetBlue needs access to London airports. While slots can be purchased or traded on the open market the carrier has been pushing for regulatory relief instead, hoping that as part of a merger or other transaction an incumbent carrier would be forced to divest some slots, making them cheaper to acquire. This deal was one that the New York City-based airline specifically mentioned and is one that will not yield the Heathrow slots it wanted. A review of the joint venture agreement for American Airlines, British Airways, Iberia, Finnair, and Aer Lingus presents a similar opportunity for JetBlue but also one where the odds remain stacked against the carrier.

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The final approval for Flybe comes after a temporary approval issued on 21 February 2019 where the shares were acquired and operations began to transition. That initial, conditional consent by the EC aimed to help “prevent flight cancellations to the detriment of consumers and helped avoid staff layoffs, while the merger review was ongoing.”

Still to be determined is just how well a(nother) local feed option will support the Virgin Atlantic operation. The company tried short-haul, domestic flights in England previously with Virgin Red and that experiment proved a failure by every metric. The renewed operation will take on the Virgin branding, shedding some of the negative associations Flybe earned in recent months as it struggled on the operational front leading into the buyout. Even with the Virgin Atlantic brand the new Connect Airways will operate independently under its own operating certificate. The new carrier is  owned 40% by Cyrus Capital Partners, 30% by Stobart Aviation, a wholly owned subsidiary of Stobart Group, and 30% by Virgin Atlantic Limited, the holding company of Virgin Atlantic Airways and Virgin Holidays.